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April 25, 2014

The Best Way to Evaluate MLPs

A study by Yorkville Capital explains which master limited partnerships are outperforming their peers and why

New York-based Yorkville Capital Management gives some interesting insights into the value of the partnerships’ distribution increases in a recent study.

“The takeaway for advisors is that distribution growth represents the most productive way to evaluate the MLP asset class and underpins the investment thesis for MLP investing," said Darren Schuringa, managing partner at Yorkville Capital.

Yorkville points to three elements in MLPs’ total return: current income, growth of income and price appreciation.

Distributions influence all three factors, and provide several primary benefits, according to the report: (1) a hedge against inflation — preserving the purchasing power of the investment; (2) protection against rising interest rates — capital preservation; and (3) powers price appreciation — growing income streams increase the principal value of the investment.”

Looking at its universe of listed MLPs, Yorkville identifies and ranks the partnerships that showed the “highest quality distribution growth” from the first quarter of 2008 through the fourth quarter of 2013.

The highest ranked securities became the components of the Yorkville Distribution Growth Leaders Index (YGMLP, YGMLPX).

The component MLPs are equally weighted in the index, and Yorkville will review the list quarterly and adjust it as needed on a regular basis.

Large- and mid-cap partnerships represented 90% of the index as of the late 2013, and infrastructure MLPs accounted for 65% of it.

Growth Case

Yorkville compared the performance of the distribution-growth leaders with its overall MLP index.

The results of the study make a strong case for using distribution growth when evaluating a partnership’s investment potential.

Distribution growth leaders delivered average distribution growth more than two times that of the MLP Universe: 12.3% versus 5.2%

MLPs in general, as measured by the MLP universe, were 11 times more likely to cut distributions than distribution growth leaders.

Distribution growth leaders exhibited greater distribution stability than the overall asset class. Of the observations studied, the leaders increased their distributions year-over-year 97% of the time versus 79% of the time for MLPs in general.

“MLP Distribution Growth Leaders provide more reliable income than the broad MLP universe, while growing income streams preserve purchasing power by serving as a hedge against inflation and protection against rising interest rates,” Schuringa said. “Growth MLPs offer optimal fundamental total return exposure to MLPs.”

(The report, “Yorkville MLP Distribution Growth Leaders Index: A Complete Study of Fundamentals, Returns, Risk, and Correlations,” is available online.)